Since Argentina's economic crash, the territory's film industry has been fighting its way back to health. But while the industry has been weathering the storm - 90 films were produced last year and directors such as Daniel Burman, Pablo Trapero and Lucrecia Martel are drawing plaudits around the world - the climate at home is tougher than ever.

A rapid rise in inflation has sent production costs soaring, upsetting the sector's equilibrium and increasing the need to find overseas partners. "We are now depending more and more on foreign investments," says Veronica Cura of Aqua Films, which co-financed Ariel Rotter's Berlinale competition title The Other with French and German funds. The $500,000 film, about a man's response to the news he is to become a father, picked up the Jury Grand Prix Silver Bear and the Silver Bear for best actor. It was backed by Selavy Productions in Germany and Celluloid Dreams in France, which is handling international sales.

Attracting foreign money is becoming a necessity for producers who are seeing the value of state subsidies - the key source of financing in Argentina - slump. With the average budget at around $500,000, producers can usually expect to receive $200,000-$250,000 from the national film institute, Incaa, which has an annual film fund of more than $30m drawn from cinema tickets, video sales and rentals.

But with budgets rising, Incaa subsidies are now worth less to producers. "Four or five years ago, you financed up to 70% of the total cost with loans and subsidies provided by Incaa. Now [they are worth] 40%," says producer Diego Dubcovsky, who manages BD Cine with his partner Daniel Burman and is involved in the new consortium (see box, right).

Despite overseas acclaim for Argentinian directors, a falling share of local box office is compounding the difficulties: Argentinian productions claimed an 11.6% market share last year, down from 19.1% in 2000. Most Argentinian films failed at the local box office in 2006, including those from acclaimed film-makers such as Pablo Trapero, Diego Lerman and Carlos Sorin. "We have very interesting auteur movies, but now we need to focus on commercial films with more solid scripts to regain audiences," says Incaa president Jorge Alvarez.

An upturn in co-productions could help. Since the 65% peso devaluation in 2002, Argentina "has been very tempting for international players", says Haddock Films' Vanessa Ragone. Haddock was set up last year as a partnership between Ragone's Zona Audiovisual in Argentina and Spain's Tornasol Films. The company has several projects in the $2.5m range in pre-production. These include Gabriel Bossio's Spain-Uruguay co-production Dale De Bomba, and Juan Martinez Moreno's A Good Man, as well as an adaptation of Claudia Pineiro's award-winning novel Las Viudas De Los Jueves.

Another ambitious new local outfit with an overseas partner is Pampa Films. Pablo Bossi - former president of Argentina's leading production house Patagonik Film Group - and director Juan Pablo Buscarini partnered with Spanish producers Julio and Carlos Fernandez from Filmax to launch the company in 2006.

Pampa has announced a seven-film slate for 2007, beginning in March with Ricardo Darin's directional debut The Signal. Other projects include: Andres Schaer's animated movie The Hairy Tooth Fairy 2: The True Story, a sequel to the local family hit; top local star Florencia Pena's comedy Getting Crazy (Enloqueciendonos); and Raul Rodriguez Peila's Azucena: 375 Days, a biopic of Azucena Villaflor, founder of Mothers of Plaza de Mayo, written by Aida Bortnik.

US studios are also present in Argentina. Major producer Patagonik has Buena Vista International as a partner, with BVI releasing all of its titles. Patagonik's recent hits include Juan Pablo Buscarini's The Hairy Tooth Fairy, which hit one million admissions in 2006. Kramer & Sigman Films, which produced such international breakouts as Carlos Sorin's The Road To San Diego, Adrian Caetano's Buenos Aires, 1977, and Hector Babenco's forthcoming The Past, has a first-look deal with Twentieth Century Fox Argentina. The company is working on new projects from Damian Szifron and Caetano as well as Santiago Amigorena's Another Kind Of Silence, a co-production with France's Mandarin Films to be shot this year in the north of Argentina with Juliette Binoche.

- The Other, reviewed p20.